BofE bond market review: Reassessing valuation and pricing

By: Dev Bhudia | 29 Sep 2015

Following the Bank of England Financial Policy Committee (BofE) publication of a six month investigation into bond markets, Dev Bhudia, vice president of product management at GoldenSource, shares his views on the pricing and valuation fears across Fixed Income currently.

The BofE review into the health of the bond markets comes at a welcome time – particularly as the issue of illiquidity is unlikely to go away. The challenge is that for financial institutions, it is much harder to value bonds as liquidity continues to shrink. High periods of illiquidity, like we have witnessed this year, can even mean that a greater number of instruments are left without market-based prices.

Financial institutions relying on one source of pricing for illiquid bonds leave themselves open to the weaknesses of the specific pricing service they choose. The problem is that trust in a single source of information attracts the beady eye of the regulator, and has the potential to affect the accuracy of daily calculations – ranging across net asset values and exposures.

This is why we are seeing more institutions reassess their valuation practices. Many are now collating different prices from a variety of sources, applying business logic in a transparent manner, before locating them in a central place for better audit and distribution – not leaving them to be lost spreadsheets or systems where operational risk and manual errors frequently occur.

This approach could very well be a sign of things to come across the Fixed Income markets. We have recognised this which is why customers are making use of our market data solution to automate pricing processes – helping them save costs while improving data quality and compliance as a result.